Japan Economy Shrinks in Q2 in Setback for 'Abenomics'

Japan's economy shrank at an annualized pace of 1.6 percent in April-June as exports slumped and consumers cut back spending, a bad omen for Prime Minister Shinzo Abe's policy drive to lift the economy out of decades of deflation.

China's economic slowdown and its impact on its Asian neighbors have also heightened the chance that any rebound in growth in July-September will be modest, analysts say.

The gloomy data adds to signs that Japan's economy is at a standstill and may rekindle market expectations that the Bank of Japan will expand monetary stimulus later this year.

The contraction in gross domestic product (GDP) compared with a median market forecast of a 1.9 percent fall and followed a revised expansion of 4.5 percent in the first quarter, Cabinet Office data showed on Monday.

Private consumption, which makes up roughly 60 percent of economic activity, fell 0.8 percent in April-June from the previous quarter, double the pace expected by analysts.

It was the first decline since April-June 2014, when an increase in the sales tax hike hit consumption, as households spent less on air conditioners, clothing and personal computers, said a government official briefing reporters on the data.

Overseas demand shaved 0.3 percentage point off growth as exports to Asia and the United States slumped, the data showed.

Economics Minister Akira Amari put on a brave face, blaming the contraction on temporary factors like bad weather that kept consumers at home.

"Income conditions continue to improve as a trend so private consumption is expected to recover gradually," he said in a statement after the data release.

But economists have already sharply cut their growth forecasts for the current fiscal year and expect the BOJ to do so too when it reviews its long-term projections in October.

"If the economy in July-September turns out to be weak, there is a chance the BOJ will implement more easing," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Japan's economy suffered a mild recession last year as consumption took a hit from a sales tax hike in April 2014. Growth rebounded this year, only to slow again as exports and consumption remained disappointingly weak.

Japan's economy shrank at an annualized pace of 1.6 percent in April-June as exports slumped and consumers cut back spending, a bad omen for Prime Minister Shinzo Abe's policy drive to lift the economy out of decades of deflation.